Markets were absolutely enamored with Wednesday’s inflation report out of the US.
Bonds were the bane of equities’ existence for most of the last four or five weeks, a period during which the term premium widened to the highest in a decade and longer-end yields breached 5%, raising the specter that 10s might revisit cycle highs.
The heavier bonds traded, the more anxious richly-valued equities became. The drama crescendoed late last week in a distasteful bear flattener following a(nother) strong US jobs report. By Monday, market pricing reflected fewer than 25bps of easing for 2025, which is to say traders had begun to question whether the Fed would lower rates at all this year.
Fed pricing reset sharply on Wednesday, this time in a dovish direction, following a decent read on core consumer prices, which rose at the slowest pace last month since the summer, even as Main Street’s still grappling with a price level crisis of generational proportions.
As the figure shows (and tells) market pricing was back to 40bps or so of easing priced for 2025 mid-week. So, one cut fully-priced plus very high odds of a second.
Naturally, that bolstered beleaguered stocks, which were on track for a banner session. Positioning in rates was probably stretched on the bearish / hawkish side, so the CPI-driven rally had the potential to incentivize profit-taking.
The CPI release followed a likewise benign read on producer prices Tuesday, and helps take some of the “sting” out of the NFP overshoot and disconcerting uptick in University of Michigan inflation expectations, which were the highest since 2008 at the five-year point in the preliminary release for January.
The simple figure gives you a sense of just how pleased previously-back-footed Treasurys really were with the numbers.
Of course, one CPI report isn’t going to put Q1 rate cuts back on the table all by itself. “It may be that rather than cutting in March… the first move for 2025 is more likely to happen in June looking at the data right now,” ING’s James Knightley said Wednesday.
“We need to see [MoM core inflation] averaging 0.17% MoM in order to be confident the annual rate of core inflation is on the path to the 2% target,” he went on, noting that as it stands, underlying inflation’s “still running too hot for comfort, hence the likelihood the Fed pause is extended well beyond January.”
Suffice to say the hawks on the Committee are still in control, even as doves were able to enjoy a much needed win on Wednesday.
Will not be surprised to see a cut in March. Seasonals are completely distorted now. I expect the big payrolls number to wash out to a more normal level. The inflation genie is not quite back in the bottle but it is close. If inflation is between 2-2.50% by the end of the first quarter, a 4% funds rate is 1% too high to keep the economy growing.
An old old friend who is a quiet reader here expects that health and property insurance prices kicking in this month will postpone or ruin the party.
But, as our Dear Leader reminds us, healthcare and housing costs are irrelevant to Wall Street analysts.
Not so fast. Commodity prices are up 10+% so far in January. Shipping costs will follow. There will be some distortion from shelter costs following the tragic fires in CA. Food costs will only rise following deportation efforts. Today’s CPI might prove to be the low for months to come.
Ok. However, looking through some of the data- it looks like egg prices are “only” up 38% in the last year.
I was paying $10 per dozen last year for the best eggs I could find. Being a former egg farmer.
Luckily my neighbor has a work friend with $3 eggs per dozen and they are the best I’ve ever had
Egg price increases are mainly due to our old nemesis Exotic Newcastle Disease now being strongly augmented by bird flu. Depite the brilliant GOP campain messaging, there is little or nothing Biden, Trump or Powell could or can do about those twin scourges.
It’s truly a “Black Swan” event …….
H-Man, wait till the rise in oil drip into the CPI.
Does it seem a little pointless to study the monthly subtleties of current CPI components, with a blizzard of E.O.’s coming in five days?
Sure, an academic can argue that a price increase due to a tariff is merely a one-time event, not “inflation”. Similar logic didn’t convince during Biden either. What about price increases rippling downstream through the economy over months and years? What about price increases from tariffs phased in 2% per month over years?
Naah, wake me up in a week, I’m going skiing.